03 December 2014

One Year In

It's a bit over a year since the last Federal election and I had been considering doing a post to show the changes that have occurred in the tax-transfer system over the first 12 months of Parliament 44. I have to confess though, that the charts showing the 12 month results are, for the most part, pretty boring, and to date this had stayed my hand.

However, I have been intrigued by the continuing coverage that the Government's first budget has been getting, a recent example being this opinion piece by Ross Gittins. The article outlines a number of budget measures that might be perceived as unfair, suggesting that this is giving the Government continuing grief, popularity-wise. What struck me about this is that almost none of the measures mentioned in the article have actually come into effect, having been held up, voted down or amended by the Senate.

In fact, despite the rhetoric around the impact of the Government's budget measures, the changes to the tax transfer system that have actually occurred over the first 12 months arguably look more like stereotypical Labor outcomes. That's not to say that this will remain the case. Many budget measures have had their implementation dates pushed back as part of the wheeling and dealing to get them through Parliament. Others are still before Parliament and may yet see the legislative light of day. But the key thing, for me at least, is that most of the 'horror' budget has yet to actually bite.

So, let's look at how the first 12 months has treated some selected household types, but with an added twist: we'll also look at what the Government had intended to achieve, tax-transfer wise, and thus see the difference between intention and outcome.

First up, let's look at a basic single-person example.

Chart 1

This chart is intended to illustrate the difference in the disposable income of a particular household type (in this case a single person) at the election date compared to the same type of household at the end of September 2014. To make the households comparable, the private income used in 2014 is being compared to the same amount in real terms (ie, CPI adjusted) at the election date.

In broad terms the chart shows that this household type had a real increase in disposable income since the election where private income is under around $25,000, but real reductions for all income levels above that. It's probably the most obvious underpinning for my earlier comment that the results look like stereotypical Labor - gains for the low income households and cuts for those on higher incomes.

There are a few things going on here. The reductions above approximately $25,000 a year result from the decline in value of the various income tax thresholds (sometimes referred to as bracket creep), a half of one percent increase in the medicare levy (as part of the funding arrangements for the NDIS) and, for incomes above $180,000, the imposition of a budget repair levy. Note too that the intended and actual outcomes are the same for this income range. The Government actually got its way here, albeit in only a small way - the budget repair levy is the only change that was not already happening under Labor.

For incomes under $25,000 the story is a little more complex. First, at zero private income there has apparently been a real increase in disposable income (in this case, the maximum Newstart allowance [NSA] package) of a little under 1.5%. At first blush this seems impossible, given that the rate of the NSA package is tied to movements in the CPI. The cause is timing - it's down to the relationship between the election and the dates that NSA is indexed. Although we are looking at a little over 12 months of Parliament 44, there have been three indexation increases for NSA in that time (20 September 2013, 20 March 2014 and 20 September 2014). In effect, 18 months of CPI increases are showing up in the chart rather than 12.

Moving up the income scale from zero there is a sudden boost in the gains, to a little over 4%. This is a result of a relaxation of the NSA income test - the allowable income before payment is reduced has been increase from $62 to $100 a fortnight. This too is a hangover from the previous Parliament - a change made by it that has come into effect early in the life of Parliament 44.

The sub-$25,000 region is also where the intended result differs from what actually happened. Two measures were supposed to have been in place by 20 September that would have produced the blue line outcome - the abolition of the income support bonus and a freeze on indexation of the clean energy supplement, both parts of the overall NSA package. These measures were modified as a result of Senate negotiations/amendments and although passed, will come into effect later than originally scheduled.

So that's our baseline single person covered. Next let's look at another single person household, this time with someone of age-pension age.

Chart 2

Here we have two income ranges where the Government seems to have got its way. The traces at incomes above around $62,500 are the same, as are those below about $12,500.

At the lower income end of the scale this simply reflects that the pension changes announced in the budget, particularly dropping the link between wage levels and rates, are not intended to start for some time yet. The higher income result is as per the earlier discussion about single Newstart allowance.

And the bit in between? By now the Government had intended to have abolished the mature age workers tax offset (MAWTO - a scheme introduced in the Howard era to improve the incentives for older workers to remain in the workforce). The legislation for its repeal is still before Parliament. Interestingly, if the legislation is passed in its current form it will be retrospective to 1 July 2014, meaning that the Government's intended result may yet come to pass. It just hasn't yet.

A similar change announced in the budget is the removal of the dependent spouse tax offset (DSTO). Like MAWTO, this was already being phased out under arrangements introduced by Labor. The budget decision is to chop the entitlement out from 1 July 2014, rather than the slowly fading away approach currently in place. Again, like MAWTO, this has not yet happened. Let's look at an older couple household to see how this theoretically affects them.

Chart 3

For this household type there is a large gap between intention and outcome. Once again the outcome side has a stereotypical Labor look, assisted considerably by the three lots of indexation rate increases I mentioned earlier. Also showing up is the effect of the relaxed NSA income test, as discussed in the single person example. From about $48,000 the actual outcomes moves into negative territory as the increased medicare levy and tax-creep effects overcome the higher pension rate paid to the non-working partner. The significant dip at $150,000 is due to the inflation-induced reduction in real terms of the DSTO household income threshold of $150,000 - the point at which entitlement to that offset is lost under current arrangements.

The blue 'intentions' line is rather more interesting. It shows the effect (or lack thereof) of four measures that were meant to be in place but as yet aren't. At the low income end the gap reflects the intended abolition of the income support bonus (affecting the NSA partner) and the non-indexation of the clean energy supplements (affecting both partners. As income rises we are also seeing what would have happened had the MAWTO and DSTO been removed. The losses these produce would have peaked at a little over a 6% reduction in disposable income (approximately $3,200) since the election date for those earning $78,000.

Once again, this is a reduction still waiting in the wings depending on the passage of the relevant legislation.

These are quite substantial reductions in household income, but they have not attracted much media attention. On the other hand, the changes affecting sole parents have attracted quite a bit, so let's finish off with a look at a sole parent with school age children.

Chart 4

Once again there is a wide discrepancy between what the Government had intended and what has actually happened (so far).

Intention and outcome come quite close together at private incomes of $100,000, but don't completely align until $150,000. That small gap reflects what would have happened had the Government's proposal to not index Family Tax Benefit on 1 July 2014 come into effect. That small contribution is also present at all incomes below $100,000, but is vastly outweighed by the proposed abolition of the schoolkids bonus and income support bonus.

The abolition of the schoolkids bonus did pass Parliament, but in a rather different form to the original proposal. Instead of being removed in one hit, entitlement was taken away for those with incomes of $100,000 a year or more (hence the dip at $100,000 in the chart), with removal for those on lower incomes pushed out to the end of 2016.

My original point was that the actual changes to the tax-transfer system over the first 12 months of Parliament 44 have not resulted in changes to disposable income in quite the way that discussion of the budget would suggest. Instead of losses, lower income households are still ahead, but only because the intended changes have been moved into the future.

There's a saying that actions speak louder than words, which, given the negative publicity the proposed budget changes have generated, might actually be a terrifying prospect from the Government's perspective. After all, if the Government can cop this much opprobrium from things so far only spoken of, what will happen if and when they actually come to pass?